Chemdex fell through lack of user support

Online marketplaces need partnerships with bricks-and-mortar companies to survive. That's the lesson from one of the highest-profile business-to-business collapses in the world.

Shifting markets, jittery moneymen, and an unrealistic business model make online markets virtually impossible, says John Thorpe, European president of Ventro Corporation. The company owns the Chemdex laboratory supplies market, which closes this month.

Ventures which follow Chemdex's lead will share its fate, Thorpe told Computing at the Institute of Economic Affairs online markets conference in London.

"We had this vision of added value services, but we were struggling just to get end-to-end transactions through," said Thorpe.

"By most judgements, Chemdex was doing well. But we were not hitting the revenue growth in the business plan which, in hindsight, was too ambitious."

"The key issue was, we couldn't reach liquidity fast enough. The goalposts changed. The moneymen turned off the tap," added Thorpe. He claims that fewer than 50 marketplaces are running live transactions.

Many observers have begun to question the business models adopted by independent operators, and Thorpe acknowledges that Chemdex, and its successors, got it wrong.

"Our operating model was not what we had hoped. It was based on Chemdex taking title of the goods and having end-to-end responsibility for the transaction. Because of US accounting rules, the top-line revenue looked good because we could take every transaction as revenue, but the gross margin was less than six per cent. It's the approach everyone took. They were all following our model," said Thorpe.

Chemdex, formed in 1997, will cease trading on 31 March despite offering 1.7 million products from 2400 suppliers to 37,000 registered users, and achieving annual revenue of $150 million.

"Independent marketplaces need partnerships with bricks-and-mortar companies that bring liquidity," said Thorpe.

The failure of Chemdex, the fourth largest online marketplace in the world, contributed to a $618 million loss last year for Ventro.

Also published in Computing